Considering an extended auto warranty? Use caution
Craig Deitch, a service technician at highly rated Hugh White Honda in Columbus, Ohio, checks the oil during a routine warranty service. (Photo by Joe Maiorana)
Before buying an extended auto warranty, automotive experts tell us it's important to conduct plenty of research in order to avoid being duped.
According to the vehicle manufacturers, dealers and independent providers we interviewed, every extended auto warranty comes with exclusions and prices average from $1,500 to $2,000. And experts say consumers should proceed with caution, especially if the solicitation came via the mail or phone.
“A number of these third-party (auto warranty companies) are fly-by-night operations that go belly up within a few years, costing consumers hundreds of dollars in out-of-pocket repairs and leaving them without coverage,” says Ron Montoya, senior consumer advice editor for Edmunds.com, a top online resource for automotive information. “A third-party warranty is so named because it has no direct business relationship with the product it covers. In this case: your car.”
Proceed with caution
Angie's List member Dean Davis of Chandler, Ariz., says he was duped. After buying a pre-owned 2008 Honda Accord, Davis rolled the cost of a $2,000 extended warranty into his car loan. “I wanted to ensure the car would not have any major mechanical costs during the finance period,” he says. However, six months later when the car’s air conditioner malfunctioned, Davis says it compounded into nearly $1,000 worth of damage. “Lo and behold, I was informed that the ‘tier’ of coverage I have does not cover the failure.”
While Davis says he didn’t feel pressured into the sale, he thought the warranty package covered everything mechanical and electrical on the car. “I thought it covered basically everything except deliberate destruction or failure to maintain, such as changing the oil,” he says. “It lists a dizzying array of parts of the engine, transmission, axles, electrical and A/C components. But obviously not the $7 [A/C] relay that caused all my problems.”
Dan Keenoy, general manager of Don Massey Cadillac in Lone Tree, Colo., said in 2012 that unscrupulous third-party companies prey upon unsuspecting consumers. “It’s buyer beware,” he said. “There are a lot of scams out there.” Oftentimes, car owners receive phone calls or materials in the mail that appear to be from a legitimate source, namely the car’s manufacturer. “They’ll say it doesn’t matter what the year, what the make, or what the model is ... they’re going to cover it from this point on,” Keenoy added. “That’s absolute total baloney.”
Auto warranty scam leads to settlement
For Joyce Garner of Peoria, Ariz., a TV commercial promising extended warranty coverage for used vehicles convinced her to sign up and pay $99 a month for nearly a year to U.S. Fidelis, a company based near St. Louis. But “every time I would call them for a claim, they denied it,” she says. “They came up with one reason or another. I finally quit paying them. I’m elderly, I’m on disability and got nothing for paying all that money.”
In July 2012, following a two-year investigation of U.S. Fidelis by the Internal Revenue Service, U.S. Postal Service, FBI and the Missouri attorney general, a federal bankruptcy judge in Missouri accepted a settlement in the case that places $14.1 million, garnered from liquidating the assets of owners Cory and Darain Atkinson, into a restitution fund to compensate eligible consumers who submit a valid proof of claim with the bankruptcy court. Investigators say the men, who also did business as National Auto Warranty Services and Dealer Services, sold warranty packages to as many as 625,000 consumers in 29 states, plus the District of Columbia.
The settlement follows their guilty pleas earlier this year to one count each of federal felony charges of conspiracy to commit mail and wire fraud, and filing false tax returns, according to the Missouri AG’s office. The federal indictment says the pair deceived consumers from 2006-08 by marketing and selling worthless vehicle service contracts with no affiliation to an automobile manufacturer, no authority to provide an automobile manufacturer’s factory warranty and no authority to alter or extend a factory warranty.
In September 2012, Cory Atkinson was sentenced to four years for the state charges and 40 months for the federal charges, and Darain was sentenced to eight years for the state charges and eight years for the federal charges. Both men were ordered to serve their sentences concurrently in federal prison, as well as pay $4 million in restitution to the IRS for conspiracy to commit mail and wire fraud and filing false tax returns. The men’s attorneys did not return calls seeking comment.
“It’s terrible to do something like that, especially to an old person,” says Garner, who intends to submit a claim for refunds. “I’m just thankful they got caught.”
Also in 2011, the Federal Trade Commission reports it returned nearly $3.2 million to about 4,450 consumers who bought bogus auto warranties from now-defunct Transcontinental Warranty. The FTC alleges Transcontinental hired several telemarketers to blast consumers with illegal prerecorded calls that tricked them into buying vehicle service contracts under the guise that they were extensions of original vehicle warranties. Settlements with the FTC ban the defendants from telemarketing and require them to pay restitution. In October 2011, court documents indicate the company’s president Christopher Cowart and vice president Cris Sagnelli are serving a five-year prison sentence and a $15,000 fine after pleading guilty to federal fraud charges.
Researching auto warranty companies
To avoid getting scammed, vehicle owners need to thoroughly research auto warranty companies they’re considering for proper business registration and insurance coverage, says Jane Lanzillo, spokeswoman for the Service Contract Industry Council, a nonprofit industry association. A majority of providers purchase insurance from heavily regulated insurance companies to guarantee the performance of all of their service contracts, she says. Currently, 37 states require specific registration, including proof of financial backing. Also, the FTC says many service contracts — regardless of who sells them — are handled by independent administrators, who act as claims adjusters, so it’s important to research both the seller and administrator. Lanzillo cites the top three third-party administrators as Automobile Protection Corp., Advantage Warranty Corp. and Universal Underwriters Service Corp.
After you’ve researched the company and looked for the best extended auto warranty, it’s important to understand exactly what’s included in the contract. “Unfortunately, many consumers buy an extended service contract without taking the time to fully understand what the contract covers,” said National Institute for Automotive Service Excellence spokesman Tony Molla in 2012. “The best advice would be to read the contract carefully before you sign anything.”
More than half of about 1,000 Angie’s List members responding to a recent online poll say they’ve purchased an extended auto warranty; 43 percent of which say they spent more than $1,000 for the coverage. However, nearly 66 percent say they didn’t shop around for the best deal, but Montoya thinks it’s important. “You can negotiate for the extended warranty,” he says.
The term “extended warranty” is actually a misnomer, industry experts say. A warranty is a guarantee from the manufacturer of a product to repair or replace it within a specific amount of time, and it’s included in the price. An extended warranty is really a “service contract,” because it’s sold separately for an additional amount of time and costs extra. Before buying one, Montoya says, consumers should review the model’s reliability record and consider how long they plan to keep the car.
Look for a factory-backed warranty
Kenneth Weaver of Las Vegas recommends buying one from the dealership, as he did from highly rated Planet Nissan in Las Vegas. “It’s the best value,” he says, noting that the cost may triple if you wait until the original manufacturer’s warranty expires. “Also, by purchasing at the dealership, you can get a manufacturer-backed warranty for new cars.”
Industry experts agree that a factory-backed service contract is best. “I would say the manufacturer products are most widely offered and traditionally a better value,” says Don Smith, general manager of highly rated Hugh White Honda in Columbus, Ohio. However, Montoya also encourages car owners to shop around for the best price. “Most people end up buying one at the same time they buy their vehicle so they can roll the price into the financing,” he says. If you wait, he says, you can evaluate the car before comparing prices. “The one disadvantage is you’ll have to pay it upfront instead of rolling it into a monthly payment,” he says, adding that you can buy an extended warranty after the manufacturer’s expires, but the cost goes up.
Molla also notes that some service contracts may require an ASE-certified technician perform all repairs. Car owners should know their contract’s stipulations for using specific repair facilities and what service records are required. But most contracts don’t cover normal wear and tear items. “There’s very little the repair shop can do to address the disappointment and frustration experienced by a customer who discovers too late that the extended coverage he or she purchased wasn’t quite as extended as they had thought,” Molla says. “Read the policy; the fine print. Remember, an informed consumer can’t be taken advantage of.”